Halden Zimmermann – Stermon Mills Case Analysis 1

Executive Summary

Stermon Mills is small, independent fine-paper producer. The company is nearly

one hundred years old and operates with some machinery that is nearly 50 years old. At

present, Stermon’s machines are very costly to operate based on the amount of output

they produce. Faced with some of these issues, Stermon Mills must decide on the best

course of action to take to improve the overall business of its uncoated paper production.

Some of the options that Stan Kiefner may choose include: (1) upgrade machine #4

which is the largest and newest machine producing nearly 50% of the output at Stermon

Mills; (2) adopt new ways of working at the plant which would include the changing of

the run cycles on machine #4 which would reduce changeover times; (3) improve the

yield on machine #4 on the less frequently produces grades of paper which is currently

more strongly focused on 20 lb. Xerox paper; or (4) accelerate the flexibility program

which was being worked out with the Union. This program would improve the

effectiveness of the labor at the plant and was already underway. Also, creating an

effective workforce that had an effective use of time would increase production and

lower overall labor costs. It is important to note that the best course of action may be a

combination of two or three of the best choices that are offered. Also, some of the

choices may conflict directly so it is important to choose the combination that will offer

the best combined effort.

Market Analysis

The North American market is the world’s largest producer as well as consumer of

uncoated fine paper. Using 1989 estimates, this North American market accounted for

nearly 45% of the uncoated fine paper capacity and 44% of the world’s uncoated paper

consumption. Production in US and Canada met nearly all the demand for uncoated

paper in North America. Imports and exports of paper accounted for only 5%, however,

there has been growth recently in the high quality coated or top-end and commodity

uncoated low-end fine paper.

Growth in demand for uncoated fine paper increased in the late 1970’s due to a growth in

the information processing area of the office/business segment. Also, US uncoated fine

paper shipments had increased significantly when compared to the other classes of paper.

This strong growth in demand for uncoated paper in the 1980’s along with capacity

expansions to meet long-term demand hurt the industry during the 1989-1992 recession.

The recession had left excess capacity in the industry along with depressed prices.

International Paper was the world’s largest paper company with sales of $ 12.96 billion

in 1990. Uncoated fine paper accounted for 18% of its total sales. It also produced a

full line of uncoated paper with such well known brands as Hammermill and Springhill.

Various types of papers were offered such as printing, envelope, tablet and reprographic.

Consumer’s also showed a strong preference for Hammermill laser paper.

Georgia Pacific (GP) was the world’s second largest paper company after acquiring Great

Northern Nekoosa (GNN) in March of 1990 for $ 3.7 billion. Total sales in that year

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